A Big Dollar Rally In Asia

Good day…. And a Tub Thumpin’ Thursday to you! It’s only Thursday, with agony, that I said this morning as I sat on the side of the bed, wishing, and hoping and thinking and praying that I could just lay back down, and go back to sleep! But NOOOOOOOOO! It’s only the 4th day this workweek, Chuck… So suck it up, and get to work!

The currencies sure could use a pep talk this morning too, given the dollar buying that was so strong in the overnight markets… But, just where are those dollars getting spent on? It’s certainly not U.S. Treasuries, as evidenced by the ratcheting up of the 10-year Treasury yield… (it gained 4 more bps last night to 1.81%) Dollars aren’t going to stocks, otherwise we would have seen more than a negative $7.36 move in the Dow, or a measly $1.60 gain in the S&P 500, yesterday… So, I need to find out where the dollars are going, and then I can lay claim to being the Super Sleuth, I’ve always imagined myself to be! HA!

But… the major dollar buying did hit a speed bump this morning, and the currencies have attempted to heal from the overnight action. But it’s going to be a tough row to hoe, given the optimism that the U.S. traders are embracing. That optimism (from the strong Retail Sales report from July, never mind that June’s negative number basically means the two months were flat), was fueled late yesterday when two Fed Heads, one a voting member (Fisher), and the other a non-voting member (Kocherlakota) both gave separate speeches with both sounding very hawkish… No surprise to me that Fisher sounded hawkish, he’s been the lone wolf Fed Head when it comes to voting for keeping rates at zero… The other guy… which is a mouthful to say, is also a hawk, but not as consistent as Fisher…

But, still, given the hawkish talks, and the optimism anew in the traders’ minds, the dollar held the hammer overnight… That’s different that what we’ve seen recently, where the overnight markets sold dollars and the NY market bought them. So, if the overnight buying of dollars carries over to the NY market, we could very well see a complete Risk Off Day…

There has been renewed talk about the Eurozone, and the problems of Spain and Italy… I’ve told you all about what Greece has to do, but this is more about the ability of Spain and Italy to carry on without having to ask for debt forgiveness… There was an article in the Globe and Mail that caught my eye as it relates to the Spain and Italy fears… Let’s see what they G&M has to say about these fears…

“One of the persistent fears about the European crisis is that the Eurozone partners won’t be able to save Italy and Spain if there’s a run on their sovereign bonds. But a study released Wednesday by the Washington-based Peterson Institute for International Economics offers some hope. “Based on probabilistic approach to sovereign debt projections, the sovereign debt of both countries is sustainable.” – William Cline senior fellow Peterson Institute.

Mr. Cline went on to say that, “a central implication of the analysis here is that both Spain and Italy remain solvent. The two large at-risk debtors have been and should continue to be treated as solvent and capable of carrying their debt rather than requiring some form and extent of debt forgiveness.”

OK… well… if it were just that easy that someone like Mr. Cline could make that statement, and the markets would all back off their pressure on both Italy and Spain… Hopefully they read this report though, and it gives them something to think about, eh?

The Wall Street Journal writer, called again yesterday… Apparently, she liked what I had to say last week… This time, she wanted to know about the weakness in the Aussie dollar (AUD)… I told her that I believed it to be profit taking, as the A$ got pretty lofty last week rising to near $1.06… I also told her that we could very well see some range trading in the coming days as the dog days of summer trading have set in. I then said something that I sure hope she uses in her article… I told her that the markets were being blinded by the light of the U.S. Retail Sales report, but… on one hand strong U.S. data should be good for global growth currencies like the A$… but on the other hand the disappointment of no Fed stimulus is offsetting the global growth catalyst for a stronger A$…

Commodity prices have increased in the past week… and that should underpin the A$, and allow it to remain strong. So, maybe this is where the dollars are going… to commodities… The CRB Index (commodities) has risen from a low of 266.80 on 6/21 to 301.30 yesterday. Interesting don’t you think? If money is flowing into commodities, it could mean one thing… inflation fears…

There’s a story this morning on CNBC (not that I watch that station!) about money flowing into Turkey… Let’s listen in… Foreign investors are scrambling to gain exposure to Turkey’s rapidly growing economy. Inbound investment hit $15.9 Billion last year, a 75.7% increase over the previous year. Turkey’s gross domestic product (GDP) grew 8.5% last year… Hmmm… plays well with my call the past year, that the Emerging Markets are the place to be going forward…

The price of Oil is higher this morning (part of that increase in the CRB). The price of Oil has reached $94 and change, that’s nearly a 3-month high… And long time readers know what I usually follow a discussion about the price of Oil rising, with… so, I’ll keep it brief… The petrol currencies use the price of Oil as a foundation to stronger levels…

And one of those petrol currencies is the Canadian dollar / loonie (CAD)… The loonie pushed to a dollar price of $1.01 overnight… This is the strongest the loonie has been in 3 months, so it’s been a long time coming. The Canadian Gov’t usually goes into convulsions when the loonie reaches and goes beyond parity to the U.S. dollar. But, what do they expect? The Banking sector is one of the strongest in the world, their economy is running smoothly, neither weak or too strong, it’s that baby bear-like economy… Shane Enright, executive director at Canadian Imperial Bank in Toronto, had this to say… “Canada is still seen as a safe place to park money on a relative basis.”

One thing to think about with the loonie… it’s not just gaining against the U.S. dollar… the currency has gained against the majority of its 16 most traded peers… That means the loonie is stronger VS the euro, stronger VS yen, etc. etc. …

Shoot Rudy… even German Chancellor Angela Merkel is impressed with Canada… She praised Canada’s budget discipline, promotion of economic growth, and “not living on borrowed money”, and said that “Canada is the right solution for Europe.” Now… you can have Chuck talking about Canada, but when you can get the German Chancellor to do it… then you’ve got something!

I had to stop to sing along with the Turtles great song: She’d Rather Be With Me… Come on, admit it, you’re humming that song in your head now! I’m back now… sorry for the interruption, and now back to our normal programming…

Yesterday, the stupid CPI report printed for July… and according to the book cookers at the Gov’t… Inflation actually fell .1% in July from June… Can you believe that? And year-on-year it fell .2%… See now why I call it stupid? What good does that do for anyone, to report something that so wrong? Oh well.. I shake my head in disgust and move along, for these are not the droids we’re looking for…

In addition, The Empire Manufacturing (NY region) index showed a lot of rot on the manufacturing vine, but no one seemed to notice… But Industrial Product (+.6%) and Capacity Utilization (79.3%) were both marginally better in July than in June…

Today, we will see some second tier data… it’s “only Thursday”, so that means the Weekly Initial Jobless Claims will print… we’ll also see the color of Housing Starts and building permits… But not much that’s going to move the markets either way, so we’ll move on here…

Then There Was This… Talk about the question, “have we come to this?” and according to this story on Alternet.org we have come to this… here you go… it’s not pleasant…

“We have such an eroded public safety net that folks are reduced to selling their life insurance policies for the sake of paying their medical bills.

When we think of “innovative financial products,” we probably think of credit-default swaps, collateralized debt obligations, and other ghoulish abstractions that we nervously half-remember from that last Michael Lewis book we read. We probably don’t think of life insurance. But a fascinating new article in the New York Times Magazine gives a very informative tour through the “life-settlements business:” an emerging marketplace whereby people who need cash near what is ostensibly the end of their life sell their life insurance policies to a third party for a price.

As ghoulish as this sounds, the article’s writer, James Vlahos, makes the case that this is in fact a pro-consumer innovation in the life insurance marketplace. But what many commenters to the article really find ghoulish is the simple fact that [here in the U.S.A.] we have such an eroded public safety net that folks are reduced to selling their life insurance policies for the sake of paying their medical bills and the other costs associated with old age.”

To recap… There was a huge sell off of the currencies in the overnight markets, especially in Asia. The dollar was bought up by the truckload. But where are these dollars going? Not bond, not stocks, where? Maybe Commodities… The Peterson Institute says that Spain and Italy are solvent and should be traded as such. And Chuck tells the Wall Street Journal that the A$ weakness is probably profit taking…

About Chuck Butler:

Chuck Butler is the Managing Director EverBank Global Markets. The father of the Daily Pfennig® newsletter, Chuck has a career in investment services and currencies spanning 35+ years. His tacit knowledge of the global markets along with his inventive spirit has led to the creation of many distinct and innovative currency-based products. A respected analyst of the currency market, Chuck has made frequent appearances on MarketWatch, USAToday, CNNfn, Bloomberg Television, and CNBC as well as quoted in The Wall Street Journal, US News & World Report, and The Chicago Tribune.